First American's Odeta Kushi says most of it sits with borrowers locked into low rates
While mortgage rates have eased slightly over the last week from their highs in the mid-7s of earlier this month, the market still isn’t very enticing for homeowners hanging on to a low-rate mortgage.
However, there are opportunities to win those customers. Homeowners are sitting on a record amount of equity, and most of it belongs to those people locked into low rates.
The combination of record equity and an aging housing stock provides an opening for brokers and originators to pitch equity products to those not interested in parting with their existing mortgage.
New data from First American shows just how much equity is available for borrowers to tap into.
Odeta Kushi (pictured top), vice president and deputy chief economist at First American, said the case for a home equity line isn’t just about rising equity.
"The reason to tap a HELOC now isn't because you're betting on continued house price appreciation," Kushi told Mortgage Professional America. "It's because you're rate locked in."
A record, mostly locked in
First American Data & Analytics put accessible equity at a record $13.2 trillion in the second quarter, the first time it has topped $13 trillion in data going back to 2005. The report counts equity that can be withdrawn while keeping a borrower's combined loan-to-value ratio at or below 80%.
"We've estimated the level of tappable equity to be just above $13 trillion, which, I think, amounts to in our population about $240,000 of tappable equity per household," Kushi said.
From there, First American looked at who could realistically use a home equity line. That meant adding rate lock-in to the picture.
"No one's doing a rate-and-term refi anymore because it doesn't make sense," Kushi said. "When thinking about that, we said, ‘Well, let's add another element, which is, how rate locked in are you?’ Because your probability of getting a HELOC is not just how much tangible equity. It's whether you're rate-locked in."
Most of that equity, 88%, belongs to homeowners whose mortgage rates are below the prevailing rate. That locked-in share is worth $11.6 trillion, down 2% from a year earlier.
That benchmark was Freddie Mac's 6.49% average on June 25. Rates have risen since, with the 30-year average at 7.24% in today's update.
The lock-in built quickly. The locked-in share climbed from around 20% in 2021 to more than 90% by the end of 2022, as rates rose and homeowners held on to the low ones they had.
A borrower just below the prevailing rate faces a different tradeoff than one who locked in 3% in 2020, so the report sorts the gap into four tiers. Of the locked-in equity, 83% sits in the most extreme one, with borrowers more than 150 basis points below the prevailing rate.
California homeowners stand out. Among the 100 most populous metro areas, the four with the most locked-in equity per property are all in the state, led by San Jose at $899,406, followed by San Francisco at $596,864, Los Angeles at $553,137 and San Diego at $513,563.
"It's pretty heavy in California," Kushi said. "There's a lot of tappable equity there, but they're also very rate locked in."
Where the door opens
The lock-in is easing at the edges. Compared with a year earlier, locked-in equity in the lowest-severity tier rose 25%, while the extreme tier fell 4%.
Connecticut has the smallest locked-in share at 74.6%, followed by Massachusetts at 76.7% and Rhode Island at 77.7%. Kushi said the picture is different outside California.
"And then there's other parts of the country where it's in the 70% range," Kushi said. "Still very high."
Among the 25 markets with the most locked-in equity per property, New England metros such as Providence, R.I. (22.3%), Boston (18.9%) and Bridgeport, Conn. (18.7%) have larger shares of it in the low and moderate tiers. This could make a cash-out refinance competitive again for a larger pool of homeowners.
For borrowers with the deepest lock-in, a home equity line or loan may beat giving up the low-rate first mortgage. Those closer to prevailing rates may find a cash-out refinance more appealing.
Access isn't only about spending, Kushi said. She pointed to the security of having the money available.
"How many of them maybe would prefer the safety of knowing that they have that money to tap into, in this economy?" Kushi said. "And of course, on the distressed side of things, it's nice to know that there's so much equity cushion."
HELOC utilization, which Kushi said the Fed publishes, has risen a bit from last year to about 44%. She said that is near its historical range of 44% to 45%.
Kushi said the lock-in leaves home equity lines as the natural alternative to a refinance. The data suggests the key question is the least costly way to access equity, not how much a borrower can take out.
"And so why would you refi?" Kushi said. "We think that's certainly an opportunity."
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
